No one yet has much idea who the next governor of the Bank of England will be even though a decision may well be announced as early as next month's autumn statement by the chancellor. But one thing is surely clear. Whoever it is, they will have a Herculean agenda to deal with the moment they move into their new office in Threadneedle Street.
Top of it will be the capital city: London is quite clearly on the slide as a financial centre. The new governor will have to work out how it is to stay competitive in the decade to come.
There are, of course, good arguments for the re-balancing of the British economy away from financial services, and towards manufacturing and technology.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
For much of the last decade, the UK, and London in particular, depended too much on banking to pay its way in the world. But the best response would be for other sectors to grow faster, not for financial services to start collapsing. Unfortunately, we seem to be taking the second route at the moment.
Latest Videos FromMoneyWeek
The evidence is mounting all the time that London is no longer the powerhouse it once was. For example, it has lost top spot to New York according to a report released this week by the Centre for Economics and Business Research, New York now has more finance jobs than London, and it forecasts the number of City jobs will fall to 237,036 next year, the lowest level since 1993.
Bonus pools are shrinking, and there have been round after round of job cuts at important banks such as UBS. The major British-owned investment bank Barclays Capital is in full-scale retreat, and the Libor scandal in which Barclays took centre stage has tarnished its reputation for plain-dealing.
Meanwhile, the banking union being agreed in the eurozone may force global banks to move to Paris and Frankfurt: it is unlikely that the main euro powers will tolerate London being the centre of that union when it is not part ofthe club. Newer financial centres such as Singapore are making all the running. In short, London is losing competitiveness all the time.
It isn't going to get better any time soon. According to a study this month by lobbyist group TheCityUK, 56% of recent location decisions by global financial firms ended up with London being rejected. A quarter of the jobs lost in the sector went because the City was no longer an attractive place to do business, not because the sector was under pressure.
These are worrying trends. David Cameron promised in his Mansion House speech this week to get the government to work harder on selling the City abroad but it will take more than talk to revive its fortunes. As it takes charge of regulation, there are three things the Bank of England should focus on.
Firstly, the UK has to accept that the eurozone is likely to be in recession for many years to come. The euro is not likely to fall apart imminently, but nor is it capable of growth. Instead, London needs to focus on becoming the key finance centre for the emerging markets of Russia and eastern Europe.
Initial public offerings (IPOs) from Russia and elsewhere are often controversial and, as the Indonesian miner Bumi recently made clear, many of them don't work out very well. But there is no point in imposing standards of corporate governance tailored for mature economies on companies from nations where rule of law is a recent innovation. That is where the growth is. London needs to go after it.
Secondly, get taxes down. In the entire recorded history of the universe, there has never been a successful high-tax financial centre. Capital is too mobile. Every business cuts costs where it can, and if you can switch a transaction from one place to another at the flick of a computer switch, you will. The City can't compete when staff are having to pay 45% in taxes firms will go elsewhere.
Thirdly, and most importantly, create more banks. That may seem counterintuitive, as most of us would probably rather there were fewer banks not more. But that is because the banks we have are all virtually identical and identically bad. It's as if every car looked the same, consumed more and more petrol every year, and broke down more often without any new models ever breaking into the market.
The City needs more innovation and competition. The Bank should turn the UK into a test bed for new banking models. It should open up payment and clearing systems, and loosen up the burden of regulation, so that lots of new banks and financial institutions get started. Out of that, some real winners will emerge.
The finance industry is in crisis everywhere, with bankrupt business models and dissatisfied customers a clutch of new British banks could take on the world if they were innovative enough, much as the Japanese car makers took on the sleepy oligopolies of that industry in the 1970s and 1980s.
Finance is one of the UK's major industries. It has a long tradition in this country. It may have become over-paid, and far too dependent on state bail-outs, but, whatever its faults, there is no point in letting it collapse. The new governor needs to steer it to recovery and that means being a champion of the City as well as its watchdog.
